Procurement KPIs and Business Acumen – A Review, Part II

Next Level Purchasing (NLP) recently released a new four-part express course on Procurement KPIs and Business Acumen that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). In SI’s opinion, this course meets it goals of delivering one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs. But more importantly, as indicated in Part I, it develops and presents a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by any Procurement Professional. This framework, which is beautiful in its simplicity, is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years!

So what is the framework? We’ll get to that. First we have to describe the Sales funnel. In order to measure their progress, and success, most Sales organizations use a sales funnel that represents the various stages that a potential customer goes through before becoming an actual customer. The basic funnel has three tiers: leads, prospects, and customers. A business or individual that might be interested in the organization’s products or services is a “lead”. Once the organization has taken the time to investigate the needs and desires of the business or individual and determined that they have a reasonable probability of becoming a customer, the “lead” is converted to a “prospect”. Once the “prospect” commits to the purchase of a product or service, they are a “customer”. Not all leads become prospects, and not all prospects become customers. And this is to be expected. A successful organization is one that converts a large number of leads to prospects and a large number of prospects to customers.

Using this framework, Sales can successfully define synergistic KPIs that allow it to measure how well it is doing. Unlike a Key Resource Indicator (KRI), which is a number that represents the result of a business activity, or a group of business activities, such as revenue or number of support calls, that is often mistaken for a Key Performance Indicator (KPI), a KPI is a number that represents how well a person or group performs the activities that contribute the most to a key result. In this framework, the KRIs are number of prospects, number of leads, and, most importantly, number of customers. The KPIs are the conversion rates, i.e., the number of prospects that convert to leads and the number of leads that convert to customers. The higher these conversion rates are, the better the business does. And better yet, in the sales funnel, the KPIs are synergistic, in other words, they work together and improvements in one improve the other. Let’s say the organization starts with 1000 leads, identifies 600 prospects, and gets 200 customers. In this case, it has a 60% conversion rate from leads to prospects, a 33.3% conversion rate from prospects to customers, and a 33.3% * 60% = 20% conversion rate from leads to customers. The KPIs are synergistic because a 10% improvement in the conversion rate from leads to prospect (to 66%) and a 10% improvement in the conversion rate from prospects to customers (to 36.66%) results in a 21% improvement in the conversion rate from leads to customers (to 24.2%). The effects are multiplicative, not additive.

Viewed from a high level, this funnel is a framework to get from the universe of organizations of businesses and individuals to the universe of customers — which is what matters most to Sales. What matters most to Procurement is realized savings (because that, and not value generation**, is what they are typically measured on). And this savings is relative to the universe of total spend of the organization. From the 30,000 foot view, there is no reason why one cannot create a “Procurement funnel” that takes the total spend of the organization down to the the realized savings of Procurement. And that is precisely what NLP does in this course. It defines a Procurement funnel that can be used by any organization to accurately determine it’s contributions that go straight to the bottom line while defining a framework for the definition of a base set of synergistic KPIs that can be used as a starting point for any Procurement and Supply Management organization, independent of vertical or geography.

So what is the Procurement Funnel? Come back tomorrow for Part III!

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

** Shame on the backwards thinking C-suite that still has this mentality!